Catholic Health's Texas operations include St. Luke's Hospital in Houston.
Catholic Health Initiatives acquired the operations of St. Luke’s Health System in Houston as part of CHI’s rapid growth.

DALLAS – Catholic Health Initiatives, the nation's second-largest nonprofit healthcare system, was downgraded by Moody's Investors Service Tuesday, affecting $7.3 billion of rated debt. The outlook remains negative.

The downgrade to A3 from A2 comes about a month after S&P Global Ratings made a similar move. Over the last four years, CHI has seen four downgrades as it expanded its system with the acquisition of the Houston-based St. Luke's Health System and others.

Moody's analyst Brad Spielman attributed the downgrade to "the continuation of weak operating performance across multiple markets, and the continued decline of unrestricted cash and investments."

Cash on hand has fallen from 195 days at the end of fiscal year 2014 to 150 days as of Dec. 31.

With the addition of $585 million of debt since the end of fiscal year 2014, "debt measures remain high," Spielman said. CHI's total debt is about $9 billion, according to the ratings report.

Total debt is not expected to further increase, though some debt may be restructured, Spielman said.

"The inability to show material improvement in operating performance, or the continued weakening of balance sheet measures, would likely lead to a further downgrade," he added.

Colorado-based CHI is ranked second in size behind Ascension Health among not-for-profit healthcare systems. Ascension last month issued $1.9 billion of debt.

CHI made its first foray into Texas in 2013 with the acquisition of St. Luke's Health System in the Houston area. The St. Luke's system generates more than $1.3 billion in annual revenue, according to Moody's.

CHI maintains leading or near leading market position in several of its urban markets, including Dayton, Ohio, Omaha, Neb., Lexington, Ky., Des Moines, Iowa, and Tacoma, Wash. It also maintains a strong presence in Denver, Lincoln, Neb., Cincinnati, and Chattanooga, Tenn.

The system's revenue for the current fiscal year is projected to surpass $16 billion, with six regions each contributing more than $2 billion.

Factors in the weakened performance include unfavorable changes to CHI's payer mix, weaker volumes, increased pharmacy and supply costs, increased labor and technology costs, and higher costs related to the health plan business than had been expected, Moody's said.

"Management is undertaking significant steps to produce improved operating results, and while measures are estimated to be a year behind schedule, management expects operations to achieve a favorable run rate by the end of FY 2017," Spielman said.

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